Japan’s Abe and MOF in for New Battle

The entrance to the Ministry of Finance building in Tokyo, on Aug. 24, 2011.

The battle between Prime Minister Shinzo Abe and the Ministry of Finance over economic policy shows no signs of letting up.

The two have not been on the best terms as Mr. Abe has not hesitated to turn to government spending to achieve his goal of mild inflation, while MOF has set fiscal consolidation as its top priority.

The powerful ministry was the driving force behind a plan to raise the sales tax from next April, set by the government last year. But Mr. Abe–who came to power in December–has not given the green light yet, saying he will make a final decision in October.

Now they appear to be in for a fight over next year’s budget.

The MOF wants to impose fiscal restraint in line with a plan aimed at balancing the budget by 2020. But government ministries and agencies this week filed budget requests far exceeding the levels in the current fiscal year.

On Wednesday, MOF said that the requests totaled Y99 trillion, exceeding this year’s budget by Y6 trillion and the spending cap set by the medium-term plan by Y3 trillion.

Finance ministry officials stress that curbs are necessary to cope with Japan’s aging population and the accompanying rising social welfare costs. Spending automatically grows by more than Y2 trillion a year as more people become eligible for welfare benefits, and also due to the rapid growth in national debt, which adds to debt servicing costs.

In the last fiscal year ended in March, the central government’s expenditure totaled Y97 trillion against tax revenue of Y44 trillion. Japan’s outstanding public debt has swollen to over twice the size of its economy as it kept borrowing to make up for the shortfall in tax revenue.

Many experts believe that tax hikes, economic growth and spending cuts are all necessary to fill the yawning budget shortfall in Japan.

And the MOF is confident it can review and slash the bloated requests. “We have strict spending criteria and will review the requests rigorously,” a senior official said.

But outside experts aren’t so confident.

They say that the MOF will need to compromise with opponents of the sales tax hike in order to make the increase come through.

“Mr. Abe will eventually let the tax hike happen, but he will also make sure that the ministry will feel indebted to him for letting that happen,” said Kazumasa Oguro, associate professor of Hosei University and a former MOF official.

Mr. Oguro predicts that most of the spending requests that are rejected initially by the finance ministry will find their way into an extra budget Mr. Abe’s government is expected to compile early next year to lessen the impact of the tax hike.

That will be the second extra budget under the Abe administration in just about a year.

“The effect of the first extra budget in January is already wearing off. His supporters are asking for more. It’s like a drug,” said Hideaki Tanaka, professor of Meiji University and another former ministry official. “They are demanding a reward for the big victory he got in the upper house election in July.”

Mr. Abe has reiterated that he is committed to fiscal reform as well as seeking economic growth to end 15 years of deflation.

But former MOF official Mr. Tanaka is skeptical. “Mr. Abe won’t be the prime minister by 2020, so he probably doesn’t consider meeting the balanced budget target as his job.”

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